Keep chasing that same old devil, down the same old dead-end highway
There ends the 3rd quarter; September feels a little like August. Equity markets continue to creep higher, mainly driven by technology stocks. Talk of bubbles grows louder, as Nvidia’s $100 billion investment in AI to fund its data centres stokes those concerns, fuelling a growing sense of unease among some investors that the AI chipmaker has effectively engaged in a series of “circular” deals in which it invests in, or lends money to, its own customers. Bond markets remain generally unloved, but there has been some interest in the longer end of the US treasury market. Gold remains around all-time highs, and so does Bitcoin.
The dollar basket is almost unchanged for the month, arresting its decline from earlier in the year. The Vix fear gauge is approximately where it was at the start of August. We did get that cut to US interest rates in September, with hopes of more to follow, despite the latest inflation data confirming that inflation rates remain stubbornly above the Fed’s 2% target. The US economy is showing some signs of slowing, but overall appears to be in reasonably good shape. The UK economy continues to struggle.
September, on average, sees a decline of around 1% for the S&P 500, not this time. I don’t know what happened in the past to markets into the year-end when that trend is bucked, I am sure AI could tell us, but at some point, a period of consolidation would probably not be a bad thing.
In the coming weeks, we get the start of the 2nd quarter earnings season, for Q3 2025, the estimated (year-over-year) earnings growth rate for the S&P 500 is just under 8%. If that is achieved, it will mark the ninth consecutive quarter of earnings growth for the index. The rise this month has led to more concerns about valuations, as FactSet reports that the S&P 500’s forward P/E is over 22 times. The S&P 500 now forms over 60% of the MSCI global index, but America is just over 25% of global GDP. Another measure is being used to indicate too much love for the US markets.
It was confirmed this morning that the US federal government will shut down after the Senate fails to pass funding plans. So far, Wall Street is showing little impact on equity markets. Probably at some point in the coming days, an agreement between Democrats and Republicans will be reached. I’m not sure what the implications would be if this does drag on, but one would assume there could be some impact on economic activity.